Banks have started waiving penalties for loan prepayments

The domestic private sector and foreign banks charge prepayment penalties ranging between one and three per cent of the outstanding loan principal amount. As certificates of deposit (CD) have headed to breach the 11-per cent mark on the back of tight liquidity, banks are in progress of waiving penalties for loan prepayments.

Public sector banks have already started waiving the prepayment charges. But private sector banks are still to follow the suit. Get the updated interest rates for Personal Loan India here also read the articles about how to avail the best personal loan for you.

ING -Vysya Bank sources said, “We have already done away with penalties on partial prepayments.”

Earlier banks typically opposed prepayments when interest rates were low and liquidity was in surplus. Bankers said their decision has been influenced by tight liquidity conditions and soaring costs of working funds.

Bankers stated that three- month CDs were raised at 10.5 per cent. Inclusive of costs for maintaining mandated reserve ratios (cash reserve ratio of 9 per cent and statutory liquidity ratio of 25 per cent), the effective costs were closer to about 11.5 cent on the funds raised through CDs.

CDs are considered as part of banks net demand and time liabilities and consequently eligible for both CRR and SLR. Bulk deposits through CDs comprised at least 30-35 of private sector bank lend able resources. While of foreign banks, the ratios are closer to about 40 per cent. Also, retail deposits are close to 10 per cent.

Bankers informed that till the middle of last year, many banks did a thorough research of some of their home and auto loan portfolios. The securitized papers were positioned them with other financial institutions that included mutual funds and insurance funds. Such resources were free from reserve ratios.

Prepayments of outstanding loans are free from reserve ratios and this allows banks to add to lend able resources.

On the other hand some of the foreign banks have raised cross -border resources for meeting their lending requirements. But part of the cross-border resources is short term in nature which consequently has the inherent risk of mismatches. But cross- border funds are no longer cheap, unlike in the past.

Moreover, switching over to Basel II has also pushed banks to reduce the risk-weighted assets on their books. This year, complete banking sector will be becoming compliant to BASEL II. A shrunk asset book reduced banks’ capital requirements. This is particularly in a situation, when the capital funds in the domestic and international markets are becoming increasingly difficult. Domestic banks have been facing pricing pressures for making tier two bond issues. Tier two capital bonds for public sector banks are currently priced at well over 11 per cent, including placement and reserve ratio costs.

Bankers also said that in the current scenario of hardening interest rates, delinquency risks have risen. Delinquency has forced far higher costs on the balance sheets than prepayments. This is because the process involves large provisioning or preparing for a write-offs that could translate into losses.